TARGETED COMPLIANCE EFFORTS
MAY REDUCE THE NUMBER OF INACCURATE INFORMATION RETURNS SUBMITTED BY GOVERNMENT
ENTITIES

Issued on February 15, 2011

Highlights

Highlights of Report Number:† 2011-30-019 to the Internal Revenue Service
Commissioner for the Tax Exempt and
Government Entities Division.

IMPACT ON TAXPAYERS

The hundreds
of thousands of information returns with inaccurate names and taxpayer
identification numbers that are submitted annually by government entities
create opportunities for individuals to underreport income and avoid the
scrutiny of the Internal Revenue Service (IRS).†
Those individuals that take advantage of such opportunities can create
unfair burdens on honest taxpayers and diminish the publicís respect for the
tax system.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine the extent that
government entities (Federal, State, and local) are submitting accurate
information returns and whether additional steps may be needed to further
enhance compliance with the reporting requirements.† Accurate information
reporting is central to the success of the Nationís voluntary tax system and may become
even more critical after December 31, 2011, when current law requires payments
by government entities for goods or services to be subject to a 3 percent income
tax withholding.

WHAT
TIGTA FOUND

Government
entities are more compliant in submitting information returns to the IRS with
valid names and taxpayer identification numbers than the general
population.† Nevertheless, the IRS could
not determine if $10.2 billion of income, $300.2 million of deductions, and
$12.6 million of tax withholdings were properly reported in Tax Year 2007
because of inaccurate information returns submitted by government entities.

Our analysis of
794,140 inaccurate information returns found a relatively small number of
government entities (75 of 85,139) were responsible for nearly one-half (48
percent) of the inaccuracies.† In
addition, the vast majority (86 percent) of the inaccuracies were limited to five
types of information returns.

TIGTA recognizes it will be very difficult, if not impossible, to ensure every information return submitted
contains an accurate name and taxpayer identification number.† However, focusing the IRSís efforts on the
small number of government entities that submit the largest portion of
inaccurate information returns has the potential
to deliver other benefits.† Specifically, it would likely provide the IRS
with additional information returns for computer matching compliance
programs.† This, in turn, may provide the
IRS with opportunities to increase tax revenues by detecting and pursuing
additional individuals who underreport income.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS expand the
criteria used to select government entities for compliance activities to
include the volume of information returns submitted with inaccurate names
and/or taxpayer identification numbers.†
TIGTA also recommended that compliance activities for entities selected
based on the volume of inaccurate returns not be closed until IRS personnel
assess the reasons for the inaccuracies and determine any corrective actions
that should be taken.† To help ensure any
corrective actions can be evaluated during subsequent compliance activities,
the results of these assessments should be thoroughly documented within the compliance case files.

In their response to the report, IRS officials agreed with the
recommendations and stated the corrective actions have been taken.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go
to: